Economic Highlights

Headline inflation nudged a little higher in May to 9.1%, the highest level since 1982. There was better news on the Core reading (which excludes food, energy, alcohol and tobacco) which fell from 6.2% in April to 5.9% – not that this will be of much solace to hard-pressed consumers. In a reflection of the shifting nature of demand and supply within the economy, Goods inflation eased from 8.0% to 7.2% while Services inflation rose from 4.7% to 4.9%, the highest level since 1993. The market continues to price in a very strong probability that the Bank of England will raise the base rate by 0.5% to 1.75% at its August meeting.

The final reading of the University of Michigan’s index of consumer sentiment was revised down marginally. However, there were some crumbs of comfort, because while the current conditions index fell, the expectations index rose. Meanwhile, inflation expectations were lowered from 5.4% to 5.3% one year out and from 3.3% to 3.1% in the five-to-ten-year range. There was also a healthy bounce in the sales of new single-family homes in May, with an upward revision to April’s figure. Regionally, the South and West of the country continue to win out over the Northeast and the Midwest. However, these data followed very poor readings from the latest PMI surveys, which saw the Composite reading drop from 53.6 to 51.2 (estimated 53.0). This prompted some reduction in market-based estimates or peak interest rates and also supported the rally in government bonds.

The latest S&P Global PMI surveys for the eurozone made grim reading, even worse than expected. The Manufacturing index fell from 54.6 to 52.0 (forecast 53.8), while Services fell from 56.1 to 51.9 (forecast 55.5). This left the Composite measure at 51.9, down from 54.8 (forecast 54.0). The eurozone economy is decelerating quickly, even if the PMI indicators fall shy of calling an actual recession just yet.

We pay a rare visit to Norway to comment on the latest decision by Norges Bank, the central bank. It took economists by surprise by raising its deposit rate by 0.5% to 1.25% rather than by the expected 0.25%. Talk is now of “reverse currency wars”, where central banks are desperate not to be left behind in the tightening cycle in case traders start to attack their currencies. The bank undertook this move despite printing negative month-on-month GDP in April (-0.5%) and having a relatively benign inflation experience relative to many other countries, with Core CPI running at 3.4% year-on-year in May.